I'm the author of Mingtiandi.com, a website covering China's listed real estate developers, mergers and acquisitions, and international investments by the country's property firms. During the last 11 years in China, I have served as an advisor to some of the world's largest real estate consultancies, including CBRE and Colliers International, and founded China's first online marketplace for commercial real estate, RightSite.asia. Since working with the US Department of State in Thailand in the early 1990s, I've built businesses in China, Vietnam and Thailand.

How China is Helping Its Private Equity Firms Invest Overseas

The importance of a new free trade zone for China’s outbound investment wave became apparent this month when a new fund management firm set up in the zone by a consortium of Chinese and US financial firms announced the expansion of a cross-border investment fund from $1 billion to $1.5 billion. The private equity fund appears aimed at leveraging the more liberal currency regime in the special economic area to give Chinese capital easier access to overseas assets.

FTZ Private Equity Fund Unites Chinese and US Partners

According to a recent story in The Wall Street Journal, Bohai Industrial Investment Fund Management Co. and Harvest Fund Management Co – both Chinese fund managers, will be teaming up with US financial advisory firms Rosemont Seneca Partners and Thornton Group LLC to raise the fund for investing in high-end manufacturing, financials, consumer, and energy and resources outside of China.

The fund is using a company set up in Shanghai’s Pilot Free Trade Zone (FTZ) as a way to simplify access to foreign exchange, and experts on the web of regulations that China has put in place to control its currency indicate that this approach will make it possible for the fund to more rapidly deploy Chinese capital for acquiring overseas assets.

A commuter waits for a train at a metro station in Shanghai’s pilot free trade zone. Image credit: Wikimedia

The investment vehicle, which began fundraising in the second quarter, has already bumped up its target from $1 billion to $1.5 billion. Under the original target, the partners aimed at raising RMB 3 billion ($483 million) in Chinese yuan and $500 million in US dollars. The fund would make use of the FTZ’s simplified foreign exchange rules to convert the RMB portion of the fund to US currency for acquiring assets overseas.

Free Trade Zone Simplifying Cross-Border Investment

Bohai Harvest RST (Shanghai) Equity Investment Fund Management Co was set up in the FTZ by the four partners during December last year, just a few months after the special economic area was established. Unlike China’s earlier economic zones, which were established to spur export-oriented manufacturing, the new FTZ is largely aimed at trying out more liberal approaches to business, particularly with regard to cross border trade and investment. Changes in controls on foreign currency access were a big part of the reforms being tried out in the zone.

Already, Chinese private equity firm Hony Capital has reportedly made overseas acquisitions through the FTZ since it was opened in September last year, so I spoke with Mr Li Qiang, Managing Partner in Shanghai with US law firm O’Melveny & Myers, which advises Hony as a client, about how the new fund might benefit from the more liberal currency regime in the zone.

“By operating through the FTZ, a fund like this, or any other investor, would be able to move up to $300 million out of the country through a simplified process,” Li said. “That’s a benefit that’s not yet available elsewhere.”

While China did issue new guidelines for overseas investments in April this year aimed at simplifying cross-border currency movements, the implementing rules necessary for the new law to be put into place have yet to be issued.

In the FTZ, however, approval for overseas investments of up to $300 million is said to be achievable in less than a week.

According to Li, while some consultation with the authorities in the zone was likely necessary for Hony to make their acquisition earlier this year, it was still a much simpler and faster process than would have been possible without the FTZ.

Historically, China has closely controlled the conversion of its currency, which does not float on the open market, as a way to safeguard their economy against external influences. As the country becomes more integrated in the world economy, and as local Chinese companies and individuals continue to make overseas acquisitions, pressure is building for the government of the world’s second largest economy to loosen its grip on cross-border currency flows.

Chinese ODI Becoming a Trend

The wave of overseas investment by Chinese players that the FTZ is enabling has grown exponentially in recent years, as China’s economy has slowed and the country’s investors begin to look for returns overseas.

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